After strengthening in risk-off trade early this week, the Pound New Zealand Dollar (GBP/NZD) exchange rate then stumbled as ongoing turmoil in the UK bond markets forced a further intervention from the Bank of England (BoE).
Today, the BoE widened its gilt buying programme to include inflation-linked gilts. Announcing the decision, the bank said there had been a ‘further significant repricing of UK government debt’. It warned:
‘Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability.’
Looking ahead, GBP/NZD could see further volatility as the UK’s financial markets remain vulnerable.
What’s Been Happening: GBP/NZD Zigzags Lower as UK Bonds Fall
Despite a bullish market mood, the risk-sensitive New Zealand Dollar (NZD) wavered lower against the Pound (GBP) at the start of last week’s trade.
Sterling found support as the Bank of England’s (BoE) emergency intervention soothed markets and Chancellor Kwasi Kwarteng U-turned on plans to abolish the top rate of tax.
However, the tide turned for GBP/NZD mid-week. The Reserve Bank of New Zealand (RBNZ) delivered another half-point interest rate hike, which saw the ‘Kiwi’ fluctuate higher.
Meanwhile, UK bond yields began selling off once again, unnerving GBP investors. Additionally, Fitch Ratings downgraded the UK’s credit outlook from ‘stable’ to ‘negative’.
The Pound ‘Kiwi’ pair regained some ground at the end of the week as market sentiment soured, thereby weighing on the riskier New Zealand Dollar. However, Sterling still remained down on the week.
Three Things to Watch Out for This Week
- UK GDP
Economists expect the UK economy to have stalled in August, which may weigh on GBP. Any surprise results could cause significant movement.
- Risk Appetite
The Russia-Ukraine conflict, Federal Reserve rate hike bets, and turbulence in bond markets could all influence risk appetite. If the mood remains downbeat, it could dent the ‘Kiwi’.
- UK Financial Stability
UK markets have been in turmoil since the government’s mini-budget, and the BoE interventions seem to be less impactful than hoped. Any fresh risks to the country’s financial stability could weigh heavily on Sterling.
GBP/NZD Forecast
This week could bring a continuation of the volatility that has characterised the Pound in recent weeks. Overall, however, GBP/NZD may remain relatively strong amid widespread risk aversion, unless the UK faces further fiscal turbulence.